Logistics in the Middle East – Domestic demand creates logistics momentum
The first two briefings in this series focused on the Middle East’s potential as a global and regional logistics hub. However investment in industrial projects, infrastructure as well as the creation of a vibrant Middle Class, have provided significant momentum to the domestic logistics industry.
According to the Agility Emerging Markets Logistics Index, Saudi Arabia, the Middle East’s largest economy, is third behind only China and Brazil in terms of prospects. Among the world’s largest emerging economies, no country has improved its position as much as Saudi Arabia, which was in ninth position in the Index rankings five years ago. Saudi Arabia is in the midst of unprecedented public spending with projects that include building and expanding airports, roads, ports, universities, industrial complexes and other infrastructure.
Saudi Arabia’s Gulf neighbour, the United Arab Emirates, comes in at No. 6 in the Index. The Market Compatibility portion of the Index, which measures whether conditions are favourable for business and trade, was dominated by Gulf countries Qatar, UAE, Oman, Saudi Arabia and Kuwait, along with nearby Jordan. Attracting foreign direct investment has been an important factor in the development of the countries in this region as they seek to diversify their economies away from dependency on oil and gas.
The investment in infrastructure projects across the region is vast. From the King Abdullah Economic City on the Red Sea in Saudi Arabia to the Qatar-Bahrain Causeway in the Gulf, billions of dollars are being spent on a range of oil and gas, industrial, healthcare, transportation and hotel/leisure projects.
In the Gulf, although the construction market was impacted by Dubai’s financial woes, especially in the residential and hotel sectors, there are plenty of other major projects continuing. Abu Dhabi, unaffected by the crisis not least because of its large natural resources, is one of the key areas for building work.
Construction has also continued apace in other countries where government investment has been the driving force, particularly Saudi Arabia and Kuwait. Each project represents a considerable opportunity in terms of logistics and, due to the long term nature of many of these projects, they offer a sustained revenue stream for many years. This is not to mention the on-going logistics requirements for existing oil, gas and chemical operations. After initial construction these installations need to be supplied with spare parts, pipes and oversized parts that often require special handling. There is also a need for procurement and purchasing, origin logistics, customs clearance, freight forwarding and local transportation.
Retail developments key to logistics
The development of the retailing sector is absolutely critical to the future of logistics in the region. Global brands demand a great deal of sophistication in the marketing of their products. The added layers of logistics complexity require the development of a supply-side capable of undertaking value adding services, for example in the pre-retail preparation of goods.
The UAE stands out as the key market for Western brands, and is already fully saturated, according to AT Kearney’s Global Retail Development Index. All the same, Abu Dhabi is set to expand its Mall space by almost 50% by 2015 and the retail market in the UAE is expected to grow by 33% between 2012 and 2015.
The UAE also has the highest fashion clothing sales per capita in the developing world and has the highest number of international retailers present in the market. Kuwait ranked third in the index, with Saudi Arabia in fifth. Importantly, contracts are being signed with local joint venture partners to create retailing networks across the whole region which will increase the penetration of the international retailers significantly in the years to come.
The Middle East, in line with developments in western markets, is also experiencing a transition from fragmented local high street retailing to supermarket formats. It is not just at the top end of the market that changes are occurring. Supermarkets now account for the greatest share of retail fresh, chilled and frozen food sales in Saudi Arabia. Although still relatively underdeveloped, the growth of supermarkets and hypermarkets is expected to accelerate.
Cold Chain in demand
Across the region as a whole, the increasing value of food and pharma supply chains has created the demand for temperature controlled services and property. There has been a real boom in construction of refrigerated warehousing, particularly Dubai as well as Oman, Kuwait and Saudi Arabia. In general, investors think big, which means that a capacity of 50,000 pallet positions is considered more or less normal. In addition to this, of course, there is a very important transit market led by airlines such as Emirates.
Express carriers have been at the forefront of introducing cold chain services. As long ago as 2005, DHL announced the launch of a temperature controlled express delivery service in Saudi Arabia. The service combines express distribution with guaranteed security and validated temperature controlled packaging, transport and distribution.
Improvements in cold chain logistics are also impacting on food retailing. The Middle East region contains a number of rapidly growing retail markets for a wide range of consumer goods, mainly imported. The high level of imports is largely due to the small indigenous manufacturing base in the region and, particularly in the oil rich countries, the desire for western convenient, frozen and chilled, foods.
An example of this trend was the announcement in late 2013 by global consumer goods retailer, Spinneys, that it was to build a Dh55 million ($15m) dedicated cold storage facility in the logistics cluster of the Khalifa Industrial Zone Abu Dhabi (Kizad) in Abu Dhabi.
There are considerable opportunities for logistics out-sourcing in the Middle East. At present it is estimated that rates are around 12%, compared with 25-30% in Western Europe. This means that many efficiencies which have been introduced in developed countries are still lacking in the Middle East, even in many of the more sophisticated markets.
Government has a major role to play in the promotion of out-sourcing. In many countries the practice is actively discouraged by ‘agency’ laws or by regulations which favour in-house operations. However as well as liberalising markets, governments can also encourage state-owned companies, which often have large transport and warehousing divisions, to privatise them or at least bring in private sector partners.
This would have other benefits. High levels of fragmentation exist in the industry across the region, with few major logistics players, and many of these being owned by the global groups. Carving out logistics companies from SOEs would provide additional competition at the higher end of the market.
To the same end, governments are encouraging state-owned companies in the transport sector to become more active in the market. Post Offices, airlines, shipping lines are all leveraging their position in these growth markets to become more competitive on a global basis.
Whether as an international transit hub or as a consumer market, the Middle East is a region which cannot be ignored by global manufacturers, retailers or logistics companies. It is certainly true that the levels of opportunity are somewhat tempered by geo-political risks, not least the role of Iran and the potential contagion of Syria’s instability. Even Qatar’s relations with fellow GCC countries have recently deteriorated. However the major economies such as Saudi Arabia and the UAE have vast wealth, good security, increasingly robust transport infrastructure and a desire to develop their economies to Western standards. The implications of this for the logistics industry, both global and domestic, should not be underestimated.
This is the final instalment in a series of three whitepapers published in advance of the upcoming Ti Emerging Market Logistics Conference in Dubai on June 4-5th.
For further information please contact Sarah Smith, Head of Marketing & Events, [email protected].